On Wednesday, Barclays (LON:BARC) initiated coverage on Apache Corp (NASDAQ:APA) stock with an Equal Weight rating and established a price target of $40.00. The firm cited Apache's robust free cash flow (FCF) generation as a positive factor. However, it also pointed out that a discount valuation is justified due to the company's short duration portfolio and significant abandonment liability.
The analysis highlighted that Apache has one of the highest FCF yields within their coverage universe, partly due to the stock's underperformance following the announcement of its merger with CPE, which was seen as accretive to valuation and FCF yield.
Despite the merger's benefits, Barclays believes that Apache's challenges, including its short inventory life in the U.S., the difficult economic environment in Egypt, geopolitical tensions in the region, and high tax and environmental liabilities in the North Sea (NYSE:SE), justify a more cautious valuation.
Barclays also noted that while the Suriname project is expected to add long-term value and profitable production growth starting in 2028, it is not sufficient to alter the company's portfolio mix without further exploration success. The firm acknowledged the potential for better-than-expected operational and cost synergies from the CPE acquisition, but still sees Apache's inventory runway in the U.S. as relatively short compared to peers.
The firm's valuation of Apache accounts for approximately $2.5 billion in asset retirement obligations and $743 million ($422 million discounted) in Gulf of Mexico decommissioning liabilities, which it considers a substantial environmental liability for a company of Apache's size.
Under current strip prices, Apache is trading at 3.8 times its 2025 enterprise value to debt-adjusted cash flow (EV/DACF), compared to the large-cap exploration and production (E&P) peer average of 5.2 times. This represents a wider discount than the historical average of approximately 1.0 times versus its peers. The $40 price target from Barclays is based on a blended target multiple of 4 times the estimated 2025 EV/EBITDX and 1 times net asset value (NAV).
InvestingPro Insights
Recent data from InvestingPro highlights Apache Corp's financial metrics and market performance, providing a deeper understanding of the company's current position. The company's market capitalization stands at $12.96 billion, indicating its significant presence in the industry. With a P/E ratio of 4.33 for the last twelve months as of Q1 2023, Apache is trading at a valuation that suggests it may be attractive to investors looking for earnings-based investments.
An InvestingPro Tip worth noting is that Apache has maintained dividend payments for 54 consecutive years, which could appeal to income-focused investors, showcasing the company's commitment to returning value to its shareholders. Additionally, the company has been profitable over the last twelve months, which aligns with analysts' predictions that the company will maintain profitability this year. This is a positive sign for investors looking for stable earnings performance.
The company's stock has also seen a strong return over the last month, with a 13.73% price total return, reflecting recent market confidence. For those interested in further insights and tips, InvestingPro offers additional analysis on Apache Corp, which can be accessed with a special discount using the coupon code PRONEWS24 for an extra 10% off a yearly or biyearly Pro and Pro+ subscription. With several more InvestingPro Tips available, investors can gain a comprehensive understanding of the company's potential risks and opportunities.
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